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Page added on June 6, 2014
Modeling Peak Oil and the Geological Constraints on Oil Production
Abstract We propose a model to reconcile the theory of inter-temporal non-renewable resource depletion with well-known stylized facts concerning the exploitation of exhaustible resources such as oil. Our approach introduces geological constraints into a Hotelling type extraction-exploration model. We show that such constraints, in combination with initially small reserves and strictly convex exploration costs, can coherently explain bell-shaped peaks in natural resource extraction and hence U-shapes in prices. As production increases, marginal profits (marginal revenues less marginal extraction cost) are observed to decline, while as production decreases, marginal profits rise at a positive rate that is not necessarily the rate of discount.
A numerical calibration of the model to the world oil market shows that geological constraints have the potential to substantially increase the future oil price. While some (small) non-OPEC producers are found to increase production in response to higher oil prices induced by the geological constraints, most (large) producers’ production declines, leading to a lower peak level for global oil production.
14 Comments on "Modeling Peak Oil and the Geological Constraints on Oil Production"
Plantagenet on Fri, 6th Jun 2014 3:19 pm
“geological constraints have the potential to substantially increase the future oil price.”
Wow. Talk about the obvious.
Northwest Resident on Fri, 6th Jun 2014 3:32 pm
“…geological constraints have the potential to substantially increase the future oil price…”
And economic constraints have the potential to substantially sink the future oil price via demand destruction because there is a point at which very few will be able to afford that increased future price.
Salaries and government hand-outs don’t increase to keep pace with the rising price of oil. Just exactly the opposite. The higher the price of oil gets, the more businesses can’t afford to continue operations, the more people lose their jobs or don’t get raises, and the less tax revenue the government collects to redistribute to the poor and unemployed.
shortonoil on Fri, 6th Jun 2014 4:02 pm
“Our approach introduces geological constraints into a Hotelling type extraction-exploration model.”
Optimistic (USGS F5) projections place the total world petroleum reserve at 4,200 Gb, of which we have extracted about 1,400 Gb over the last two millennium. Geological constraints from that perspective means that we will running into trouble (at present production rates) in about three centuries. It is likely that they will need to incorporate a few more variables in their analysis.
http://www.thehillsgroup.org/
GregT on Fri, 6th Jun 2014 5:51 pm
Careful what you say Short.
I can see the headlines already;
Peak oiler changes outlook. Says three centuries of oil reserves remain.
JB on Fri, 6th Jun 2014 5:56 pm
NR “…geological constraints have the potential to substantially increase the future oil price…And economic constraints have the potential to substantially sink the future oil price via demand destruction because there is a point at which very few will be able to afford that increased future price.”
But oil companies cannot arbitrarily cut oil and gas prices because they are in a squeeze. As prices go higher, demand drops off rapidly. If they lower prices, they go into the red.
By the way, who is eating the losses on shale oil? The oil companies, or are they borrowing at zero percent with backroom deals that they don’t have to pay it back – which would be the same as a government subsidy.
If demand drops off too much I would expect to see more subsidized oil.
rockman on Fri, 6th Jun 2014 6:51 pm
“…can coherently explain bell-shaped peaks in natural resource extraction”. Interesting. I’ve plotted a great many petroleum geology metrics. Much more complex the simple recoveries stats. From individual reservoirs in the same well to total regional trends. And I don’t recall a single instance of anything approaching a symmetric bell shape. But maybe they aren’t implying such symmetry. Then maybe the just mean the metric starts at zero, climbs at any sort of rate and decreases at any sort of rate and then ultimately returns to zero. Well, Da! I believe this is usually referred to as “life”. LOL.
The one thing I am certain of is that you can’t sell a cup of water to a man if he can’t pay the price even if he’s dying of thirst. And no matter how much gold a man owns he can’t buy even one sip from an empty canteen.
Other then that I have no idea what they are really saying. LOL
Northwest Resident on Fri, 6th Jun 2014 8:38 pm
JB — I think you hit the nail on the head. The point is, when the cost of extracting the oil is greater than the price that the oil can be sold for, then I guess we won’t be seeing any more oil. Unless, as you point out, the government (or somebody) subsidizes it — but that can only be a very short term strategy, one that buys a little more time. Kind of where I believe — and you suspect — we are right now with shale costs versus “profits” made for that shale “oil”. Short term strategy. Buying time. For how much longer, that’s the big question.
bobinget on Fri, 6th Jun 2014 9:00 pm
When Avgas went over six bucks, lots of general aviation pilots gave up on flying for fun.
from “history of general aviation”:
” a comparison of general aviation’s impact on jobs and on the economy between 2008 and 2009, shows a 20% decrease in jobs and a 21% decrease in total economic impact in the course of a year. There is also a significant decreasing trend in the active pilot population, along with steady decreases in GA flight hours and towered operations”.
Obviously, there are still rich folks flying for amusement. The 97% just got resourceful.
Turns out, folks seem to need to fly. Lighter aircraft
were INVENTED and refined. Gliders are making a comeback a is base jumping in special suits.
DMyers on Fri, 6th Jun 2014 9:02 pm
NR “…geological constraints have the potential to substantially increase the future oil price…And economic constraints have the potential to substantially sink the future oil price via demand destruction because there is a point at which very few will be able to afford that increased future price.”
I want to address the same point from a different angle. JB, you’re on with the likely subsidization theory. Your theory makes the questionable assumption that there would be an entity able to subsidize.
This demand destruction business, to begin. This makes perfect sense to me, as the supply and demand impact on price is a fairly well proven phenomenon. But there seem to be times when rationality no longer guides the trend of things. There are events like the opening of Pandora’s Box, and the shutdown of the protection grid on the Ghostbusters’ containment chamber. An energy is released which does not conform to expectations.
Take hyperinflation. We hear about various instances, Weimer, Germany, for example. As reported, prices rise dramatically, ten to a hundred times a day. This seems impossible because of demand destruction. If a loaf of bread costs a thousand bucks(or the equivalent in a hyperinflated currency), I just ain’t gonna be able to buy one, and most others won’t either. Surely, the price would come down to the buyers’ level, but it doesn’t.
There are situations in which demand destruction does not occur, in the sense of reducing prices. And one economic adage that we can put our faith in is: “prices are sticky, downward.”
Don’t put too much faith in demand destruction as a determinant in energy pricing. Events don’t necessarily follow a rational course. They may even follow a course that was unforeseen and without precedent in prior experience. If a loaf of bread can hold for a day or two at a thousand bucks in hyperinflation land, and how the hell could anyone buy one at that price, then I suppose a gallon of gasoline could do the same.
pat on Fri, 6th Jun 2014 9:34 pm
there may be centuries of oil but only a small portion of it will ever possibly be extracted. there seems the oil is set to see huge sudden jump anytime as witnessed in 2008 as all the factors show. really seems 2015 is going to see the begin of the crisis of PO the scarcity of resources..
Northwest Resident on Fri, 6th Jun 2014 9:49 pm
DMyers — When I think of what I’m terming “demand destruction”, I’m thinking about the many thousands of American jobs that were shipped to other countries. I’m thinking about the fact that cash and assets are being sucked up from the middle (and lower) class and transferred to the 1% — leaving many people totally broke, which seems to be the goal. The “demand destruction” is all of the many things going on in the financial and employment world that result in “the masses” having much, much less extra cash, thereby dramatically lowering the amount of consumption, which equates roughly to lowering the amount of oil they consume. But all the points you made I agree with. The type of demand destruction you’re talking about hasn’t hit us yet, we’re holding steady more or less, but I’m one of those who think the big hit is coming soon enough. If/when it does, others might be paying $2K for a loaf of bread, but not me — I’ll be grinding my own wheat and baking up a fresh loaf!
bob on Sat, 7th Jun 2014 9:41 am
Well I wonder people often say we can’t afford this and that but they are thinking in a vacuum so to speak…the numbers for alternatives are strange as well….yes it would be extremely expensive but 7 trillion spent on alt energy is different than 7 trillion spent on military banks etc…jobs are created here and the money does not just disappear! When we give it to banks is when it disappears….
shortonoil on Sat, 7th Jun 2014 3:07 pm
“By the way, who is eating the losses on shale oil? The oil companies, or are they borrowing at zero percent with backroom deals that they don’t have to pay it back – which would be the same as a government subsidy. ”
There are two aspects as to who is subsidizing shale. The only one we have taken a close look at is the Bakken. For the average Bakken well the ZIRP policy instituted by the FED is subsidizing their production by about $20/barrel. That is the difference between historical interest rates of 6.3% on the 10 year, and the present 2.5% rate on an $8.5 million well. The second can best be answered by the question: who financed the sub prime mortgage fiasco? These mortgages are being wrapped up as CLOs, and sold as high grade corporate bonds to the retail market. Pension funds, retirement plans, and ma and pa investors. Because of the complexity of these instruments only the very sophisticated investor could unravel them to determine were their money is going. The FED bailed out the big banks to the tune of $3 trillion, just so they could return to doing what put them in that position to begin with.
http://www.thehillsgroup.org/
Makati1 on Sat, 7th Jun 2014 9:08 pm
Then, short, the answer is that your retirement funds (401Ks, IRAs, Mutual funds, company pensions, etc.) are propping up the oil companies by buying their paper and calling it an ‘investment’? Glad I’m not in any of those ‘plans’.